Australia’s private pensions urged to cut costs

An inquiry by the Australian government has called on the country’s US$1.7 trillion private pension system to reduce costs, which it found are among the highest in the developed world.

The inquiry, chaired by former Commonwealth Bank Chief Executive David Murray, said in its interim report that the operating costs of Australia’s superannuation funds are among the most expensive in the Organisation for Economic Co-operation and Development (OECD) countries.

The report cited the Super System Review, which previously looked into the operations of Australia’s superannuation system, and found that cutting fees by around 40% would increase the average retirement payout by A$40,000 (US$37,547). The report also said that such a move could deliver total savings to members of around A$7 billion per annum.

The inquiry concluded that there are myriad reasons for high superannuation costs, one of which was the absence of strong, fee-based competition.

The biggest managers of superannuation funds in the country are presently the Commonwealth Bank of Australia, Westpac, ANZ and the National Australia Bank.

“There is little evidence of strong fee-based competition in the superannuation sector, and operating costs and fees appear high by international standards. This indicates there is scope for greater efficiencies in the superannuation system,” the inquiry’s interim report read.

It suggested that Australia’s government should follow the example of Chile, which allocates the superannuation contributions of all its new members into the same default fund, before auctioning the right to manage the funds on the basis of fees. As a result, the fees charged by successful bidders in the South American country have dropped by 65% since the approach was introduced in 2008.

The report also noted that many funds adopt active management of superannuation assets in pursuit of higher returns, leading to higher costs due to frequent rebalancing of investment portfolios.

The report into superannuation funds is part of Australia’s overhaul of its financial system, with a final report on the matter due in November.